Accounting for Investments under U.S GAAP - Assignment Example

Accounting for Investments under U.S GAAP Institutional Affiliation Date: The Financial Accounting Standards Board is the authorized private sector body in charge of creating and enhancing financial accounting and reporting standards in the United States for private and non-governmental enterprises, including small scale businesses and not for profit organizations. These financial accounting and reporting standards are jointly called the U.S Generally Accepted Accounting Principles (GAAP). The standards guide the preparation of financial reports in order to provide users with quality financial information. Investments refer to assets held for sale by a company for generation of income through dividends, interest, rentals, capital appreciation or other benefits. Investments are categorized as either long-term or short -term investments. Current investments are. Other investments that are not current are categorized as long-term investments (Epstein, Nach & Bragg, 2009). The U.S GAAP provides various standards for accounting for investments. Investment in Plant Property and Equipment (PPE) The objective of U.S accounting standards that deal with property plant and equipment is to recommend treatment of property; plant and equipment to enable users of financial information have proper details regarding the enterprises investment in property, plant and equipment and changes in such investments. The main issues in accounting for PPE are recognition of the assets, determination of the assets carrying amounts, the appropriate depreciation charges and impairment losses that are supposed to be recognized in relation to these assets (Thornton, 2013). According U.S GAAP, Property plant and equipment include tangible items that are: 1) held for the purpose of production of goods and services, rental to others, or for administrative needs, 2) anticipated to be used for more than one period and, 3) It is probable that the future economic benefits related with the items will flow to the enterprise and 4) the cost of the PPE can be measured reliably (Thornton, 2013). The cost of an item of PPE is the cash amount or its equivalent, paid in acquiring the asset, commonly adjusted for amortization and other allocations after acquisition. If an enterprise recognizes a liability for retirement of an asset obligation, the carrying amount of the long-lived asset should be increased by an amount equivalent to the liability (Thornton, 2013). Asset Exchanges Trade-ins of non-monetary assets should generally be recorded at fair value. However, if the trade-in does not have commercial substance, the fair value cannot be determined, or it is a trade -in transaction to improve sales to customers, the trade-in should be recorded at its carrying over criteria (Thornton, 2013). Subsequent costs Routine maintenance costs should be expensed as they are incurred. Major inspection and repair costs can be expensed as incurred or capitalized and amortized to the subsequent major inspection or repair. Borrowing costs are limited to interest costs that are capitalized as part of the qualifying asset’s historical cost when these assets require time to put them in a state allowing their intended use (Thornton, 2013). Revaluations/ Depreciation Revaluation is only permitted for impairment. In addition, restoration of a previous impairment loss is not allowed. Also, items of PPE should not be written up to values that are above the cost to the entity other than in exceptional cases such as quasi-reorganizations. Tangible fixed assets should be depreciated over the expected useful life. Land is not depreciated. The depreciation method use should be systematic and rational. Depreciation stops when an asset qualifies as held for sale (Thornton, 2013). Investment property Under the US GAAP, property held for investment is treated similarly to property plant and equipment. Investment property held under an operating lease should not be capitalized. Rent should be expensed as incurred. Similarly to PPE, exchange of non-monetary assets should be recorded at fair value. For public enterprises; investment property held for sale should be carried at fair value less cost to sell. In subsequent periods after recognition, investment property is measured using the cost model that requires investment property to be recorded at cost less depreciation. Fair value model is not allowed (Walton, 2009). Investment in Intangible Assets Intangible assets are assets without physical substance (excluding financial assets).The carrying amount of an intangible asset that has a finite useful life is the acquisition cost less accumulated amortization and impairment losses. The carrying value of intangible assets with an indefinite useful life is the cost of acquisition, less accumulated impairment losses. Expenditures and expenses incidental to research and development should be expensed as incurred (McEwen, 2009). In addition, revaluation of intangible assets is not allowed. An intangible asset acquired through business combinations should be recognized at fair value, distinctly from good will if it can be separated or if it arises from legal or contractual rights. An in-process research and development project acquired should be recognized as an indefinite life intangible asset at its fair value at the time/date of acquisition. An Intangible Asset should be amortized over its useful life unless the useful life is indefinite (McEwen, 2009). Investment in Inventory The term inventory designates the aggregate items of tangible nature that are: 1) held for sale in the ordinary business activities, 2) in production process for such sale,3) to be consumed currently in production of goods and services that will be available for sale. When a business operation involves ownership of stock of goods, it is important for sufficient financial accounting purposes that the stock is compiled periodically and recorded in the appropriate accounts (Thornton, 2013). Inventory is measured at the lower of cost or market value. The cost comprises all costs of acquisition, conversion and other costs of bringing the inventory to its present location and condition. However, the cost of the inventory excludes abnormal amounts of waste materials and other costs of production. These costs should be recognized as expenses in the period in which they are incurred. The cost flow assumption must clearly reflect the periodic income. Under US GAAP, cost of inventory can be assigned by either first in first out (FIFO) or weighted average method (WAM) (Thornton, 2013). Fixed production overheads should be allocated to the conversion costs on the basis of the normal capacity of the production facilities. Interest costs should not be capitalized for routinely manufactured inventory. Further, upward adjustment of the value of the inventory due to increase in market value is not allowed. When the inventory is sold, the carrying amount of that inventory should be recognized as an expense in the same period the related revenue is recognized (Thornton, 2013). All companies deal with accounting issues that should show the facts and circumstances of their particular situations.US GAAP provide guidelines in dealing with these accounting issues with the principal objective of providing quality financial information to the users of financial statements. Accounting under US GAAP continues to develop in the present world with increasing demand for greater transparency and enhanced regulatory scrutiny. The essence of proper accounting for business transactions is greater than ever before. In addition, progress has been made towards converging US GAAP with IFRS. Many US companies have already switched to IFRS (Walton, 2009). References Epstein, B., Nach, R., & Bragg, S. (2009). Wiley GAAP codification enhanced (1st ed.). Hoboken, NJ: John Wiley & Sons. McEwen, R. (2009). Transparency in financial reporting (1st ed.). Petersfield, Hampshire, Great Britain: Harriman House. Thornton, G. (2013). Comparison between U.S. GAAP and International Financial Reporting Standards (1st ed.). Grant Thornton LLP. Tokar, M. (2007). IFRS compared to U. S. GAAP (1st ed.). [London]: KPMG. Walton, P. (2009). An executives guide for moving from U.S. GAAP to IFRS (1st ed.). [New York, N.Y.] (222 East 46th Street, New York, NY 10017): Business Expert Press. Read More